It seems like kids are born knowing how to spend money. But investing is a different story.
Experts who advise families on how to coach their children through financial basics agree on several key strategies. Here’s how to help your kids see beyond the next thing they want to buy and get a grip on bigger goals and long-term payoffs.
First, don’t even bother to talk about investing until kids are old enough to think abstractly and understand math concepts, such as percentages, interest and compounding. Usually, children between ages 10 and 12 can start wading into theoretical topics and higher math, experts in family finance say. You also want to make sure your kids understand the concept of “deferred gratification,” that giving up a smaller prize now can result in a bigger prize later.
Once the child has mastered these developmental milestones, feel free to open a fresh spreadsheet for Investing 101.
Many parents use two time-tested approaches financial advisors wholeheartedly support: granting allowances and requiring children to allot their allowance money to three “buckets” — one each for saving, spending and sharing. A common breakdown is 20 percent for saving, 70 percent for spending and 10 percent for sharing, advisors say.
Suzanne Slater, a financial therapist whose Northampton, Massachusetts, practice, Gifted Generations, focuses on helping well-off families impart values to their children, recommends adding investing as a fourth bucket and introducing it as the concept of “growing money.”
The notion that you could reap more money later, simply by parking it in the right account, fascinates kids because it seems almost magical, says Hollis Page Harman, a Los Angeles-based financial advisor who runs kidsfinance.com, which focuses on teaching children financial concepts. “Dinner-table conversations about passive earnings grab even the most monosyllabic teenager,” Slater says.
When you give children an allowance and have them channel set amounts into these four buckets, “you are teaching them to treat the allowance as a paycheck,” Harman says. You are creating the norm that you always have some kind of savings available, and you set the expectation that the child is responsible for her own financial future, she says.
After a few months, the investing bucket will have accumulated enough money that you and your child can investigate some actual investments, Harman says.
Advisors agree on the wisdom of starting with consumer brands your children know, like and use often. The exercise of researching the companies that make their favorite snacks or gadgets does more than familiarize them with annual reports and company websites, Harman says. It also links consumer decisions to company results. Your kids will quickly realize that if they buy more of the products made by the company they’re investing in, they will help the company grow and support the value of the stock they own.
Zero in on a couple of stocks that reflect your child’s spending interests and buy the shares. That’s when the spreadsheet comes in, Slater says. Track the shares at least every week, so the kids catch on to normal market ups and downs. Discuss current news events and trends that may affect the company’s results and consequent stock value, she adds. “Help them understand when they might sell and why,” she says. When statements arrive, open them and review the results with your children.
After a year or so of picking and tracking stocks, your kids may be ready for the next two steps: setting up a shadow portfolio and, separately, understanding compound interest. Create a small portfolio that represents a mix of assets and types of stocks, says Tom McCullough, chairman and CEO of Northwood Family Office, a wealth advisory based in Toronto.
Of course, you can do this on a mock basis, but if your kids have enough money to diversify, consider using real money, McCullough says. “Allow natural consequences to happen,” he advises.
This is an opportunity to explain mutual funds and asset mixes, advisors say. It’s also a chance to explain the wisdom of “buy and hold.” Teens typically understand the concept of waiting for a bigger payoff down the road. Now that they’re accustomed to automatically put part of their allowances into savings, you can explain that this same principle applies to feeding a retirement account once they have a job, advisors say.
One way to make this abstraction feel more concrete is to illustrate the power of compound interest using a calculator, such as this one from the Securities and Exchange Commission.
As your children track the performance of their investments, consider taking these additional steps:
— Take them with you to meetings with your financial advisor and let them review statements and ask questions, McCullough says.
— Go through the fine print of a statement with them and point out seemingly small factors, such as fees, that affect investment performance over time, Slater says. That is another way to make the concept of growth over time feel more real, she adds.
— Jump-start their investment growth by matching funds, and tell them employers help you build retirement savings by matching your 401(k) savings, McCullough says. If you are friendly with similarly minded parents, set up an investment club in which you can coach each other’s kids and collectively review the results of your shadow portfolios, McCullough suggests.
And, Slater adds, remember that the most important thing your children will learn from you about financial management is not what you say, but what you do. If you preach saving but indulge in retail therapy every weekend, consider changing your own habits before you try to teach the kids to do what you don’t.
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How to Introduce Your Children to Investing originally appeared on usnews.com
